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Income Tax Act, 1962 (Act 58 of 1962)

Chapter II: The Taxes

Part I: Normal Tax

8F. Interest on hybrid debt instruments deemed to be dividends in specie

 

(1) For the purposes of this section—

 

‘enforcement right’

in relation to an instrument means any right, whether fixed or contingent, to require any person other than the issuer of that instrument to—

(a) acquire that instrument from the holder thereof;
(b) make any payment in respect of that instrument in terms of a guarantee, indemnity or similar arrangement; or
(c) procure, facilitate or assist with any acquisition contemplated in paragraph (a) or the making of any payment contemplated in paragraph (b);

[Definition inserted by section 16(1)(a) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016) - commenced 1 January 2017]

 

‘hybrid debt instrument’

means any instrument in respect of which a company owes an amount during a year of assessment if in terms of any arrangement as defined in section 80L

(a) that company is in that year of assessment entitled or obliged to—
(i) convert that instrument (or any part thereof) in any year of assessment to; or
(ii) exchange that instrument (or any part thereof) in any year of assessment for,

shares unless the market value of those shares is equal to the amount owed in terms of the instrument at the time of conversion or exchange;

(b) the obligation to pay an amount so owed on a date or dates falling within that year of assessment has been deferred by reason of that obligation being conditional upon the market value of the assets of that company not being less than the amount of the liabilities of that company; or

[Paragraph (b) substituted by section 16(1)(b) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016) - commenced 1 January 2016]

(c) that company owes the amount to a connected person in relation to that company and is not obliged to redeem the instrument, excluding any instrument payable on demand, within 30 years from the date of issue of that instrument:

Provided that, for the purposes of this paragraph, where the company has the right to—

(aa) convert that instrument to; or
(bb) exchange that instrument for, a financial instrument other than a share—
(A) that conversion or exchange must be deemed to be an arrangement in respect of that instrument; and
(B) that instrument and that financial instrument must be deemed to be one and the same instrument for the purposes of determining the period within which the company is obliged to redeem that instrument;

[Paragraph (c) amended by section 9(1)(a) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

‘issue’

in relation to an instrument, means the creation of a liability to pay an amount in terms of that instrument;

 

‘instrument’

means any form of interest-bearing arrangement or debt;means any form of interest-bearing arrangement or debt that is issued by—

(a) a company that is a resident;
(b) a company that is not a resident if the interest in respect of that instrument is attributable to a permanent establishment of that company in the Republic; or
(c) a company that is a controlled foreign company as contemplated in section 9D if the interest incurred in respect of that instrument must be taken into account in determining the net income of that controlled foreign company as contemplated in that section;

[Definition substituted by section 16(1)(c) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016) - commenced 24 February 2016]

 

‘interest’

means interest as defined in section 24J(1);

[Definition amended by section 9(1)(b) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

‘redeem’

in relation to an instrument, means the discharge of all liability to pay all amounts in terms of that instrument;

 

‘third-party backed instrument’

means any instrument in respect of which an enforcement right is exercisable as a result of any amount relating to that instrument not being received by or accruing to any person entitled thereto.

[Definition inserted by section 16(1)(d) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016) - commenced 1 January 2017]

 

(2) Any amount of interest that—
(a) is incurred by a company in respect of an instrument on or after the date that the instrument becomes a hybrid debt instrument is—
(i) deemed for the purposes of this Act to be a dividend in specie declared and paid by that company on the last day of the year of assessment of that company during which it was incurred; and
(ii) not deductible in terms of this Act; and
(b) is deemed for the purposes of this Act to be a dividend in specie that is declared and paid in respect of a share on the last day of the year of assessment of the company contemplated in paragraph (a) to the person to whom that amount accrued.

[Subsection (2) substituted by section 16(1)(e) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016)]

 

(3) This section does not apply to any instrument—
(a) in respect of which all amounts are owed by a small business corporation as defined in section 12E(4);

[Subsection (3)(a) commenced 1 January 2017]

(b) that constitutes a tier 1 or tier 2 capital instrument referred to in the regulations issued in terms of section 90 of the Banks Act (contained in Government Notice No. R.1029 published in Government Gazette No. 35950 of 12 December 2012) issued—
(i) by a bank as defined in section 1 of that Act; or
(ii) by a controlling company in relation to that bank;
(c) of any class that is subject to approval as contemplated in the—
(i) Short—term Insurance Act in accordance with the conditions determined in terms of section 23(a)(i) of that Act by the Registrar defined in that Act, where an amount is owed in respect of that instrument by a short-term insurer as defined in that Act; or
(ii) Long-term Insurance Act in accordance with the conditions determined in terms of section 24(a)(i) of that Act by the Registrar defined in that Act, where an amount is owed in respect of that instrument by a long-term insurer as defined in that Act;
(d) that constitutes a linked unit in a company where the linked unit is held by a long-term insurer as defined in the Long-term Insurance Act, a pension fund, a provident fund, a REIT or a short-term insurer as defined in the Short-term Insurance Act, if—
(i) the long-term insurer, pension fund, provident fund, REIT or short-term insurer holds at least 20 per cent of the linked units in that company;
(ii) the long-term insurer, pension fund, provident fund, REIT or short-term insurer acquired those linked units before 1 January 2013; and
(iii) at the end of the previous year of assessment 80 per cent or more of the value of the assets of that company, reflected in the annual financial statements prepared in accordance with the Companies Act for the previous year of assessment, is directly or indirectly attributable to immovable property.
(e) that constitutes a third-party backed instrument; or

[Subsection (3)(e)  inserted by section 16(1)(f) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016) - commenced 1 January 2017]

(f) that constitutes a hybrid debt instrument solely in terms of paragraph (b) of the definition of hybrid debt instrument if a registered auditor, as contemplated in the Auditing Profession Act, 2005 (Act No. 26 of 2005), has certified that the payment, by a company, of an amount owed in respect of that instrument has been or is to be deferred by reason of the market value of the assets of that company being less than the amount of the liabilities of that company.

[Subsection (3)(f)  inserted by section 16(1)(g) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016) - commenced 1 January 2016]